Choosing a legal form for your business affects how much you pay in taxes, who can invest in your company, and most importantly, your own personal financial security.

The legal structures you can consider include:

Sole proprietorship. A business owned by one person with no formal legal structure. Most one-person businesses start out this way, and a majority of these retain this non-formal structure. But you have no protection from personal liability if your business is sued.

Partnership. A business with more than one owner who actively engages in the management of the company. You can—in the eyes of the law—be a partnership even if you don't write up a partnership agreement. There's also a "Limited Partnership" form of business, in which the General Partners actively manage the affairs of the company and the Limited Partners are passive investors, not permitted to participate in the management of the company (and who have limited financial exposure).

Limited liability company (LLC) or limited liability partnership (LLP). A legal form that provides liability protection for the company's owners without requiring incorporation. LLCs have become a form of choice for many small companies. These are usually less expensive than "S corporations" (see below) and provide pass-through tax treatment. An LLP (not to be confused with a "limited partnership," above) is almost the same as an LLC but is used for certain professional practices, such as firms of attorneys or accountants.

"S" corporation. A type of corporation that provides personal liability protection and permits pass-through taxation. This form of corporation was particularly popular for small companies before the creation of LLCs.

"C" corporation. A corporate form that allows for the most numbers of investors, foreign investors, and corporate investors, "C" corporations also allow you to issue different classes of stock (typically "preferred" and "common"), enabling the company to give more benefits to some shareholders. Thus, major investors often want companies to be "C" corporations.

There is one other major form of company—a "non-profit, or "not-for-profit," corporation"—for organizations that are formed for the public benefit, such as schools and philanthropic agencies.

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